V.

Assionlnent
$' '$ili,l CASE STUDY
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''-JJ'd * SOUTHWEST AIRLINES

White the airline industry consistently posts billion of dollars in loses annually, Southwest Airlines has
turned a profit every yeir since 1973, something no other major canier can claim. How does a small
company such as Southwest comp€te in this highly competitive and volatile industry?
Southwest is a master of low-cost, no-frills flying. There are several features to $oulhwest's low-
cost strategy. While other major carriers fight over "prestige-building" routes to Europe and Asia.
Southwest has instead concentrated on short-haul, frequent, point-to-point domestic routes that lend
themselves to reliable, more profitable business. Southwest does not accept interline traffic (passengers
froln other carriers), nor does it provide seal reservation or serve in-flight meals.
lnstead of using major airports, Sor:thwest seeks out small, overlooked airports that are less
expensive and often ,ndre convenient for business travelers. ll fills its planes consistently offering roik-
bottom fares and it concentrates on local marketing. While Southwest spends aboul $25 million a year on
adverlising, it targets cheaper, local spot media instead of expensive network time.
ey Oefylng popular trends, $outhwest has established a low-cost structure that is the envy of the
inclustry. lts operatinE cosl per revenue mile is about 5 cents cheaper than the industry average. And
while this cloesn't guarantee Southwest a profit, it puts them in a unique position to handle price wars
brought on by the competition
A good deal of the credit for Southwest's success goes to CEO Herbert D. Kelieher. Just as the
airline has never conformed to industry norms, Kelleher does not fit the standard profile of a chief
execulive. He is wildly enthusrastic about his company, his employees, and his cuslomers * and even
periotJically works as an attendant on Sr:uthwest's flights. But for all Kelleher's flamboyance, he is
inherently conservative businessperson. Before Southwest opens a new route, Kelleher and his staff
carefuily research the business viability of the proposal, and then if they decide to move, they do so wilh
corrsiderable force. From its base in Texas, Southwest is now 7"' largest carrier in the United States, and
has expanded to more than half the United States.
Kelleher's goal is to increase the number of Southwest's seats by 15 percent each year - and, of
course, to walch the costs. To achieve such an aggressive growth target requires deep commitmenl and
capability {rom Southwest's 14,500 employees. Although 90 percent of Southwest's employees are
urrionized, Kelleher inspires loyalty at even the lowest ranks of the company. Through his vision and
management style, he has built a culture of enthusiasm and devotion to customer service. Based on
crileria such as opportunities for advancement, job security, pride in work and the company, the degree of
openrress and fairness, pay and benefits, and the level oI camaraderie among employees. Southwest has
been rated one of the 10 best companies to work for in America. lts 7 percent turnover rate is further
evidence that Southwest's employees feel committed to their organization. Kelleher even established the
industry's first profil-sharing plan, 87 percent of which employees have pumped back into the company
stock. The 24 percent of the employees who participate in the company's stock purchase plan pour about
$500,000 per nronth into it. There are indicators that Southwest has built an enormously loyal and
dedicated workforce that sustains the company's competitive advantage.

QUESTIOTiS:

What major opportunities in the airllne industry has Southwest capitalized on? What threats has it
avoided?
What strengths and core cornpetencies has Southwest leveraged to be successful? Does
Southwest have any weaknesses? Are these detrimental to its success? Why or Why not?
How do Southwest's corporate, business, and functional strategies tie together? How does
Southwest irnplement its strategies?
lf you were asked to compete against Southwesl, how would you do it?